Bull markets, bear markets and volatility
Markets go through seasons. Knowing the names helps you stay calm.
Bulls and bears
A bull market is a long stretch of rising prices and optimism. A bear market is commonly defined as a fall of 20% or more from a recent high. A drop of 10% or more is often called a correction. These are informal rules of thumb, not official definitions.
Historically, US bull markets have lasted much longer than bear markets on average, but bear markets do happen, sometimes more than once a decade, and nobody can reliably predict when one starts or ends.
Volatility is normal
Volatility is how much prices swing. Even in good years, the stock market usually has a noticeable dip at some point, and drops of 10% or more within a single year are common. Swings are the price of admission for the higher long-run growth stocks have offered.
The VIX: the 'fear gauge'
The VIX is an index that estimates how much investors expect the S&P 500 to swing over the next 30 days, based on prices of options (contracts people use to bet on or protect against moves). When investors are nervous, they pay more for protection and the VIX rises.
In calm periods the VIX often sits in the teens. In panics it has spiked above 40, and at the extremes of 2008 and 2020, above 80. A high VIX means big moves are expected, not which direction they'll go.
A portfolio worth $10,000 falls 20% to $8,000. To get back to $10,000, it needs to gain $2,000 on $8,000, which is 25%, not 20%.
After a 50% fall ($10,000 to $5,000), it needs a 100% gain to recover. That's why big drops feel so painful, and why staying invested through recoveries matters.
Key terms
- Bull market
- A long period of rising prices and optimism.
- Bear market
- Commonly, a fall of 20% or more from a recent high.
- Correction
- Commonly, a fall of 10% or more from a recent high.
- VIX
- An index of expected S&P 500 volatility over the next 30 days, often called the fear gauge.
Drops and swings are a normal part of investing, not a sign something is broken.